The Australian Labor Party (ALP) have outlined a number of changes they propose to make if elected in the May 2019 Federal Election.
The tax landscape could drastically change as of the 1st of July 2019 if Labor goes ahead with planned changes that include the denial of Franking Credits Refunds within tax structures including Self Managed Superannuation Fund’s (SMSFs).
Example: Impact to a two-member SMSF.
Fund: The ABC Superannuation Fund
Assets: $2m, both members aged 65 and both in full pension mode with $1m each in the fund.
2019/2020 Fully Franking Dividends Received $80,000 (4% yield)
Franking Credit @ 30% $34,286
Tax Rate of SMSF 0%
SMSF Tax Refund ($34,286)
If franking Credit refunds are denied $0 Refund
The annual impact to a $2m pension fund earning 4% fully franked is the loss of $34,286 (annually) in franking credit refunds. The Trustees of the Superannuation Fund may not be overly “joyed” to be burning franking credit refunds in this manner.
How can SMSF’s restructure to reduce the impact of these proposed changes?
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Add new members to the Superannuation Fund or Increase Accumulation Mode Proportions
In the above example, let’s say the fund added their two working adult children who both make Concessional Contributions in the 2018/2019 Financial Year:
2019/2020 Fully Franking Dividends Received $80,000 (4% yield)
Franking Credit @ 30% $34,286
Contributions tax @ 15% x $25,000 x 2 ($ 7,500)
Net Refund $26,786
If franking Credit refunds are denied $0 Refund
Note (No impact of the actuary has been allowed for and presume the $25,000 Concessional Contributions made on 30 June 2020).
Effectively, the $7,500 being the 15% contributions tax on the $50,000 is being “soaked up” by the Franking Credits, and thus reducing the impact of the changes to $26,786 of lost franking credit refunds.
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Rollback Pensions to Accumulation Mode to mitigate the impact
In the above example, what if the client moves fully into accumulation mode from 1 July 2019 and withdrew lump sums as and when required, what would the tax position be in the SMSF?
2019/2020 Fully Franking Dividends Received $80,000 (4% yield)
Franking Credit @ 30% $34,286
Taxable Income $114,286
Tax at 15% $17,143
Less Franking Credit ($34,286)
Net Refund $17,143
If franking Credit refunds are denied $0 Refund
If Labor deny franking credit refunds, then it may be beneficial for certain SMSFs to move into accumulation phase for the following benefits:
-No annual actuary report required
-No minimum Pension requirements in accumulation mode
-No impact on the $1.6m Pension Limit
-No TBAR reporting
The main drawback of this strategy is around the tax free moving from a percentage basis (In Pension Mode) to a dollar basis and washing in existing pensions into accumulation phase, impacting estate planning.
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Change the investment mix
Investment advisors or Trustees of Superannuation may move a portion of their investment pools away from ASX listed shares and or managed funds paying fully franked dividends to reduce the impact of the rule changes.
We may for example see Self-Managed Superannuation Fund change their asset allocations to overseas equities or managed funds, Domestic and Foreign bonds or ASX hybrids paying lower or no franked income.
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ASX Companies may change their dividend/payout policies post 1 July 2019
These changes may place pressure on ASX company to change the way in which they payout dividends. Possible restructuring at the company level:
-Use surplus profits to buy back shares as opposed to paying out dividends to shareholders
-Reduce the payout ratios of dividends and invest in future projects of the company
-Implement multiple classes of shares, some classes pay fully franked dividends (useful for top marginal rate taxpayer) and non-franked dividends
In effect the market will find an equilibrium point, and I am fairly confident that the companies themselves would prefer to retain Superannuation Funds on their share registries.
In my opinion, any Labor projections for the amount of tax recouped due to denying SMSF’s franking credit refunds may be overly optimistic, as they need to factor in SMSF’s restructuring to minimise the opportunity cost forgone.
These tax reforms may or may not come to fruition however it is worth thinking about how it possibly could affect you and your SMSF.
Please contact our office for a no obligation discussion around how we can help you with your Self-Managed Superannuation Fund.
Foundation Advisory
Phone 03 9878 7647
Email info@foundationadvisory.com.au
